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Canada M&A Roundup Q3 2019

Canadian M&A market remained robust in Q3, even though experiencing a slight decline after an outstanding second quarter. During the third quarter, 665 transactions valued at $61.2B were announced. While the Canadian buyers were less active during the quarter, the foreign companies continue to be interested in Canadian businesses. During the Q3, international buyers have announced 139 deals valued at $27.9B. Real estate, TMT and Financial Services were the main sectors driving the deal value, while Real estate, Industrials and Information Technology were the most active sectors with more than 100 transactions in each industry. Strong balance sheets, relatively easy access to capital and aging business owners looking to exit at current high valuations are the major factors that will be driving the Canadian M&A activity going forward.

M&A Drivers

Active financial sponsors

Financial sponsors played a significant M&A role during the third quarter. Seven of the nine mega-deals in the quarter involved financial sponsors, including private equity groups and pension funds that were interested in making acquisitions in Canada and abroad. Overall, financial buyers announced 22 transactions (over $100M) valued in aggregate at $22.6B. The largest deals were the acquisition of Dream Global REIT by Blackstone ($6.2B) and a majority equity interest investment in Garda World Securities by BC Partners (C$5.2B). The Canadian private equity sector that has over $20 billions of dry powder, according to a Deloitte report, represents a significant capacity of M&A in Q4 2019 and the near future.

Foreign buyers drive M&A demand

Despite trade tensions between the U.S. and China, global economic weaknesses, worries about the likelihood of a U.S. economic slowdown and ongoing geopolitical and trade tensions, foreign investment in Canadian M&A remains at historically high levels. Foreign buyers’ demand for Canadian companies remained strong this quarter with 139 transactions announced valued at $27.9B. Appetite from U.S. corporates to invest in Canada appears to remain high. U.S. buyers comprised 71% of all Canadian targeted cross-border activity and combined with a favourable exchange rate, we could expect a continued demand from U.S. buyers. While the U.S. businesses look at Canada as a very attractive investment, the inbound activity from China has declined sharply after a recent Canada-China political scandal. The ongoing strained relations involving China have had a dampening effect on deal activity during 2019, which could continue in Q4 and the near future until there is a material improvement in the Canada-China relationship.

Real Estate sector drives the deals value and transaction volume

The Real Estate sector was not only the most active this quarter with 112 announced deals but also drove the biggest portion of the transaction value ($19.0B). Brookfield’s acquisition of Genworth Financial, the largest private sector residential mortgage insurers, for $2.4B was a notable real estate mega-deal, which underscores Brookfield’s general confidence in the Canadian mortgage market. Blackstone Group acquisition of Dream Global REIT also shows an interest from the US investors to acquire Canadian properties. Safety and stability thrust Canada into one of the spotlights during the Global Financial Crisis, and an influx of global capital, record construction activity, rising home prices and high occupancy rates make Canadian REIT a very attractive investment.

Notable Deals

Blackstone Group Acquires Dream Global REIT

  • Industry: Real Estate
  • Date Announced: 08/15/19
  • Deal Size: 6,200.00M
  • Consideration: Cash
  • Target Financial Advisors: TD Securities, National Bank Financial
  • Buyer Financial Advisors: RBC CM, BNP Paribas, Deutsche Bank Securities

On September 15, 2019, the announcement was made that Dream Global REIT and Dream Unlimited Corp have entered into the Acquisition agreement with affiliates of real estate funds managed by Blackstone. Blackstone, an American Private Equity, will acquire all of Dream Global’s subsidiaries and assets in an all-cash transaction for a total enterprise value of $6.2 billion. On closing of the Transaction, Dream Global unitholders will receive cash consideration of $16.79 per unit, which represents a premium of 18.5% to the closing price on September 13, 2019, and will represent a total return for 2019 of 47%.

The Transaction allows Blackstone to expand its existing office and logistics portfolios in key markets in Western Europe with a high-quality and diversified portfolio of office and logistics assets of Core+ assets in Germany, Netherlands and Belgium. The Acquisition also benefits the Dream Global unitholders, as it offers an opportunity to receive certain premium value for their investments.

Upon completion of the Transaction, Dream Global will have increased its equity market capitalization by nearly eight times and will have delivered total annualized returns of 15% to unitholders, since inception, which exceed both the Canadian and European REIT benchmarks by approximately 60%.

The deal needs at least 66.67 per cent approval from Dream Global’s unitholders. Its Board of Trustees unanimously approved the deal and recommended the unitholders to vote in favor of it.

BC Partners buys a majority stake in Garda World Security Corporation

  • Industry: Industrial (Security and Alarm Services)
  • Date Announced: 06/23/2019
  • Deal Size: C$5,200M
  • Consideration: Cash
  • Target Financial Advisors: Barclays, TD Securities
  • Buyer Financial Advisors: Scotiabank

On July 23, 2019, Garda World Security Corporation announced that a UK-based private equity firm BC Partners would acquire a majority equity interest from Rhone Group in a deal worth C$5.2 billion (US $4B). The transaction marks Canada’s largest private buyout and is expected to close by late 2019. Following the transaction, BC Partners will own 51% stake in the company, while the Company’s CEO Stephen Cretier along with other members of the management team will own the rest.

Garda World Security, which has started as a company with a second mortgage of C$25,000   Stephen Cretier’s home, has turned into the world’s largest privately-owned security services company and is regarded as an industry leader. It offers a wide range of physical and specialized security solutions, as well as end-to-end cash management to a diverse clientele of private companies, governments, humanitarian organization.

GardaWorld went public on the Toronto Stock Exchange in 2003, then was taken private in 2012 through an investment by London-based private-equity investor Apax Partners LLP. In 2017, Apax sold its equity to Rhone Capital, which is now selling the stake to BC Partners. Following the close of the transaction, Rhone Capital will no longer have any equity participation in GardaWorld.

BC Partners plans to leave the Stephen Cretier and the management team to further grow the company while providing the company more capital to help it expand the market share in the U.S., where the company is the fifth-largest player, and elsewhere around the world. The partnership should bring significant value to GardaWorld and help the company become a true global champion in the security services industry, which is currently a very fragment market and offers excellent opportunities for consolidation.

Hasbro Acquires Entertainment One

  • Industry: TMT
  • Date Announced: 08/22/2019
  • Deal Size: $4,000M
  • Consideration: Cash
  • Target Financial Advisors: P. Morgan Cazenove
  • Buyer Financial Advisors: Centerview Partners LLC

On August 22, 2019, Hasbro, Inc. (NASDAQ: HAS) and Entertainment One Ltd. (LSE: ETO) (eOne), today announced that they have entered into a definitive agreement under which Hasbro will acquire eOne in an all-cash transaction valued at approximately £3.3 billion or US$4.0 billion. According to CapitalIQ, the Implied EV/LTM Revenue is 3.8x and EV/LTM EBITDA – 38.0x. The rich valuation underlines the entertainment industry’s rich growth potential. Under the terms of the agreement, eOne shareholders will receive £5.60 in cash for each common share of eOne, which represents a premium of 26.4 per cent to eOne’s close price of £4.43 pounds on August 22. The deal is expected to close in the fourth quarter of 2019.

The Transaction is very attractive to Hasbro, which allows the company to expand into the lucrative infant and preschool market by gaining access to popular TV shows like Pegga Pig and PJ Masks. Hasbro’s strategy recently was to buy smaller firms and tying up with major movie studios to boost sales of toys linked to movie franchises. An acquisition of Enterprise One allows Hasbro to expand its brand portfolio with two beloved global preschool brands and an attractive brand in development. Pegga Pig and PJ Masks are a global success series with big viewership across the world, generating $2.5 billion in retail sales last year. Those brands generated strong earnings in multiple arenas, including live shows, theme parks, toys and television. Ricky Zoom, a series whose main character is a red rescue bike and which is currently under development, should begin airing on Nickelodeon in the US and other top-tier global networks soon. These brands present a hot spot that Hasbro could utilize to increase revenue and profits. Besides getting access to well-known brands, Hasbro receives access to the Canadian market, where eOne’s has long-term success, in relation to its robust television and film projects. Top eOne executives have also agreed to join the Hasbro team, which allows Hasbro to leverage a talented executive team across all areas of entertainment.

Hasbro expects annual run-rate synergies of about $130 million US by 2022. The synergies would be realized via savings from moving part of Entertainment One’s toy business in house and boosting the profitability of its licensing and merchandising activities. The addition of eOne to Hasbro is expected to be accretive to adjusted EPS in the first year following the Transaction, excluding the transaction costs, with mid- to high-teens accretion to adjusted EPS in the third full year following the closing of the Transaction as synergies are achieved.

Hasbro expects to finance the Transaction with the proceeds of debt financing and approximately US$1.0 billion to US$1.25 billion in cash from equity financing. Hasbro plans to maintain its quarterly dividend and suspend its current share repurchase program while it prioritizes achieving its leverage target at 2.0x – 2.5x Debt-to-EBITDA.

League Table

Mergers & AcquisitionsUnderstanding a Merger and Understanding a Merger Model · Introduction to Hostile Takeovers and Unsolicited Bids · Sale and Leaseback Transactions in Investment Banking · Compiling a Buyers List in Investment Banking · Interview With A Mergers & Acquisitions Investment Banker – Part II · Interview with a Mergers & Acquisitions Investment Banker – Part I · Bid Pricing Strategy: Part II · Bid Pricing Strategy: Part I · Deal Protection in Mergers & Acquisitions · Investment Banking Bake-Off or Beauty Contest · Acquisition Finance: Equity Consideration · Acquisition Finance: Bullet Debt · Acquisition Finance: Bank Debt · M&A Process Walkthrough · Types of M&A Sell Side Processes · Investment Banking Teaser · Accretion/Dilution Analysis – Part IV: Synergies and Source of Funds for M&A · Accretion/Dilution Analysis – Part III: Using Debt for Acquisitions · Accretion/Dilution Analysis – Part II: Accretion/Dilution Math and Breakeven Premium · Accretion/Dilution Analysis – Part I: EPS, Earnings Yield and All-Stock Transactions · Purchasing a Company via Cash or Stock ·
Vlad Kovalenko is a student at the UofT entering his final year in September. He is currently working at Semper8 Capital, where he supports the Managing Director in executing M&A and investment projects. Prior to that, Vlad worked as a Summer Analyst at Concorde Capital, a leading Ukrainian Investment Bank. He is also pursuing the CFA Level 1 in December. Outside of school and work, Vlad enjoys running, playing soccer and volunteering.

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